DipIFR Syllabus B. Elements of financial statements - Leases - Definition - Notes ^{1 / 10}

IFRS 16 gets rid of the Operating lease (which showed no liability on the SFP).

So, every lease now shows a liability!

Therefore the definition of what is a lease is super important (as it affects the amount of debt shown on the SFP)

Here is that definition:

A contract that gives the right to use an asset for a period of time in exchange for consideration

So let's dig deeper

There's 3 tests to see if the contract is a lease..

1. The asset must be identifiable

   This can be explicitly - it's in the contract
   Or implicitly - the contract only makes sense by using this asset

   (There is no identifiable asset if the supplier can substitute the asset (and would benefit from doing so))

2. The customer must be able to get substantially all the benefits while it uses it

3. The customer must be able to direct how and for what the asset is used

Example

A contract gives you exclusive use of a specific car

You can decide when to use it and for what

The car supplier cannot substitute / change the car

So does the contract contain a lease?

Does it pass the 3 tests?

1. Is there an Identifiable asset?

   Yes the car is explicitly referred to and the supplier cannot substitute the car

2. Does the customer have substantially all benefits during the period?

   Yes

3. Does the customer direct the use?

   Yes he/she can use it for whatever and whenever they choose

So, yes this contract contains a lease because it's...

A contract that gives the right to use an asset for a period of time in exchange for consideration

Example

A contract gives you exclusive use of a specific airplane

You can decide when it flies and what you fly (passengers, cargo etc)

The airplane supplier though operates it using its own staff

The airplane supplier can substitute the airplane for another but it must meet specific conditions and would, in practice, cost a lot to do so

So does the contract contain a lease?

Does it pass the 3 tests?

1. Is there an Identifiable asset?

   Yes the airplane is explicitly referred to and the substitution right is not substantive as they would incur significant costs

2. Does the customer have substantially all benefits during the period?

   Yes it has exclusive use

3. Does the customer direct the use?

   Yes the customer decides where and when the airplane will fly

So, yes this contract contains a lease because it's...

A contract that gives the right to use an asset for a period of time in exchange for consideration